The Commodity Futures Trading Commission (CFTC) has granted no-action relief to registered floor traders from compliance with rules relating to the “swap dealer” definition.
According to the CFTC’s swap dealer definition, a registered floor trader does not need to consider cleared swaps executed on or subject to the rules of a designated contract market (DCM) or swap execution facility (SEF) when determining whether it is a swap dealer, provided certain conditions are satisfied.
“The no-action relief provided today would permit a registered floor trader to exclude DCM and SEF cleared swaps from the determination of whether it is a swap dealer, notwithstanding the registered floor trader: (1) entering into swaps other than DCM and SEF Cleared Swaps; (2) directly or through an affiliated person, negotiating the terms of swaps other than DCM and SEF Cleared Swaps; or (3) not submitting periodic risk reports as required by CFTC regulation,” says the CFTC in a release issued today.
The relief was announced by the CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO).
“Today’s relief eliminates ambiguity for market participants wishing to engage in swaps activity in their capacity as a floor trader,” says DSIO director, Matthew Kulkin, who Profit & Loss recently reported is set to leave the CFTC later this summer. “Such clarity will encourage new liquidity providers to trade cleared swaps on registered venues without regulatory uncertainty, benefiting market participants seeking to access liquid, competitive cleared swaps markets.”
Commissioner Dan Berkovitz came out in support of the decision, stating: “The current floor trader rule has not worked as intended. Potential sources of liquidity have not entered into these markets due to concerns about the potential breadth of the restrictions in the current provision. Addressing the issues with the existing rule will diversify the available sources of liquidity beyond the few large bank dealers that dominate swap trading today.”
He claimed that, in the long run, a rulemaking to amend the swap dealer definition would be the best way to solve the problems with the current rule.
Noting that CFTC chairman Christopher Giancarlo plans to direct CFTC staff to draft a proposed amendment to the floor trader provision “that is consistent with the scope of today’s no action relief”, Berkovitz says that this no action relief makes sense in the interim.
“Notably, today’s no action relief is limited to cleared swap activities conducted on a SEF or DCM. Other off-facility or uncleared swaps that meet the definition of dealing swaps will still count towards the swap dealing registration threshold for these traders,” he concludes.
By contrast, commissioner Brian Quintenz objected to the no–action relief, stating: “I have long argued for the policy implicit in today’s floor trader no-action letter – that exchange-traded and cleared swaps should not be considered when determining whether a firm must register as a swap dealer. However, I firmly believe that the floor trader exception is a dangerous vehicle, and that no-action relief is a poor process, by which to achieve this substantial and justified policy outcome.”
Essentially then, Quintenz’s issue is less around the logic behind the no–action relief granted today and more around the process of itself of granting the relief. Instead, he would like to see the CFTC change the actual rules.
“If the CFTC views cleared and exchange-traded swaps as non-dealing activity (as today’s no-action letter seems to indicate), the Commission should revise its regulations through a new rulemaking that allows all market participants – not just proprietary trading firms – to appropriately exclude such swaps from their dealing threshold. A new rulemaking should also propose including a risk-sensitive factor within the de minimis exception, like entity-netted notionals (ENNs), to more accurately measure an entity’s swap dealing activity from a size and risk perspective,” he says.
Quintenz admits that changing the rules would require more time and effort than issuing no-action relief, from both the CFTC and market participants, but argues that “if it is worth doing, it is worth doing right”.
He concludes: “A rulemaking would provide the market with long-term regulatory certainty, ensure that all firms have the benefit of a rationalised registration scheme, and prevent squeezing currently unregistered firms into a registration category so that they can perform a low-risk and highly valuable market function of adding liquidity to the swaps marketplace. In my view, that would truly be a great day for the Commission, market intermediaries, and end-users. Unfortunately, today is not one of those days.”